Angel Investing – Offering Returns that Warrant the Risk

The facts and figures of angel investing have changed, but it is still worth the risks in order to get a good return.

Introduction

Whether you are a seasoned pro or a new angel investor, you have likely been exposed to not only the rewards but also the risks of the business. In tough economic times, it can be difficult to be certain of what you are doing; doubt can sometimes prevent you from acting. But as it turns out, angel investing is not one of the things you need to second-guess. The good news is that angel investing is still profitable, and, in the United Kingdom, relatively safe to do. It is, however, a changing field out there, and keeping up with the changes can be the difference between profit and loss.

Doubt and Risks

Angel investors have helped to launch a great many number of companies that have gone on to be great successes. Google, Twitter and Facebook are usually cited as the main examples of success stories. But there are also many tales of investors getting back zero return; the thought of loss due to the company going under is a genuine concern. Just as no two investors are alike, people choose to handle the risk in different ways.

It’s a Numbers Game

The facts and numbers of angel investing have changed recently. Doubtlessly spurred by the economic downturn of the late noughties, investors are more likely to spread small amounts of money out to several companies, rather than giving a bigger lump sum to one or more companies. The potential rewards may be smaller, but the risks are greatly reduced.

A recent flood of research has confirmed that once investor’s portfolios exceeded six investments, they begin to see not only a significantly safer investment, but higher profit too. For skittish angel investors, this kind of commitment can be the answer. The UK charity Nesta calculated that about 56% of all investments are failures, but 9% return 10 times their initial investment or more.

However, spreading money out has risks in and of itself. Instead of keeping your eye on a few sums, you’ll have to watch out for many more—and keeping all of the legal terms, facts and figures straight can be complicated. The entrepreneur will also have to satisfy more investors, meaning that the company may take a sudden turn that you don’t like very much.

So is it better to centralise your investment or to spread out a bit? The answer depends on what makes you comfortable, and if you’re willing to go against the research to choose just one investment. But as many veterans of this business know, not every investment will be a failure—but not every investment will earn you a windfall, either. After all, the three companies noted above are repeatedly cited for a reason: big success stories like those are still relatively rare.

220% Average Return on Investment

It can be easy to hear all doom and gloom, but the reality is that angel investing is still a fantastic investment choice. Nesta reported that, overall, angel investing had returns of 2.2 times the initial investment. They summed it up best by noting, “Business angel investing is risky, but overall appears to generate attractive outcomes.” Kauffman, an American foundation that supports entrepreneurship, completed long-term studies about angel investing and found similar results to Nesta’s conclusions.

And, of course, the UK also has the benefit of the Seed Enterprise Investment Scheme, which could get you 78 per cent back from the government. An economy that provides better tax breaks is likely to have better ROIs. When you take all of these things into consideration, it becomes clear that angel investing is still one of the best and safest investments you can make.

Getting Personal

In the absence of offering more money to an entrepreneur, it makes a big difference to offer them your time instead. Although it is usually more rewarding and productive to invest in a field that interests you or which you are skilled in, it helps to remember that opposites attract. A banker can still teach valuable lessons to a technology start-up, and vice versa. Whether you’re on a team of negotiation experts or you know how to placate upset clients, you have something to pass on.

Giving those entrepreneurs some of your knowledge and savvy isn’t only taking “angel” literally, but it will also benefit the company, which will keep your money safe. As research as shown, angel investing is a self-propagating thing—the recipients of investments are more likely to become investors themselves, which helps to keep the business economy strong. Taking the time to get to know the person could be the reason they decide to return the favour.

Conclusion

The decision to angel invest is personal, of course, but there’s no reason to feel discouraged. For hundreds of years, the economic system of sponsors and patrons have existed, and this exchange appears to be recession-proof. Keeping your investments spread out and mentoring the entrepreneur will help to protect your investment.

About the author : Alisha Webb is a British writer working out of Barcelona and a content developer for The Gap Partnership.